As Korea's secondary stock market soars, so do doubts

[SEOUL] Many of the stocks on South Korea's Kosdaq are looking a touch frothy after more than doubling in price in under four months as retail investors plough into the market, armed with borrowed funds. Some firms are now trading at hundreds of times their earnings.

Almost one out of 12 stocks on the secondary board has more than doubled in price since the start of 2015. More than one in five are trading at least 50 times their earnings. That compares with the market's average price earnings ratio of 21 and the ratio of 9.94 on the main board Kospi, Thomson Reuters data shows. Reflecting the gains, the tech-heavy Kosdaq has risen 30 per cent, the most for any four-month period since 2009.

Fuelling the buying are domestic retail investors impatient with the relatively slow gains on the Kospi this year despite massive liquidity unleashed by central banks around the world. The Kospi comprises mostly conglomerates that promise lower risk but also lower growth. The opposite is the case on the Kosdaq, long dominated by temperamental retail investors looking to pocket quick gains. Those investors accounted for 63 per cent of Kosdaq's market capitalisation in 2013 versus 20 per cent for Kospi. South Korea has stopped releasing data on retail investors since then.

As the Kosdaq accelerated, the outstanding amount of borrowings by margin traders soared, sparking concern of a sharp market pullback should investors miss their margin calls. Outstanding loans hit a record 3.81 trillion won (S$4.77 billion) as of April 17 compared with an average of 2.56 trillion won in December, according to Koscom Corp, which compiles financial data from the exchange. "A few companies of course are rising after announcing a deal, a contract, a new business project, or something, but there's an increasing mood of 'buy first' sentiment in the market," said Hong Seoung-pyo, an analyst at Samsung Securities.

Online education services provider Longtu Korea Inc jumped 677 per cent in less than four months even after posting a loss last year. Drug maker Kyung Nam Pharm Co Ltd rose 515 per cent to trade 278 times its earnings per share. Bio-engineering technology firm iNtRON Biotechnology Inc, whose nearly 170 per cent gain in share price looks modest by comparison, is now trading at 27,603 times its earnings per share.

REUTERS